Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 16th April 1975.

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Photo of Mr John MacGregor Mr John MacGregor , South Norfolk 12:00 am, 16th April 1975

I agreed very much with what the hon. Member for Chorley (Mr. Rodgers) said about the single-parent family. I make two points about his other remarks. First, it seems to me that the Chancellor of the Exchequer is right in his analysis of the facts about the increases in wages and salaries and average earnings. It is these which have been a key factor in bringing us to our present plight. And when the hon. Gentleman says that a gross increase in a wage does not lead to the same gross increase in the family income since tax is deducted, this may be true. However, the gross increase in the total wage bill affects industrial costs and affects the costs of our exports.

Second, although I understand that the hon. Gentleman would like to see public expenditure increased, there is no question that it has been the rapid growth in public expenditure which has also led us to our present difficulties. Therefore we have to face the inevitable fact that concentration has to be put on improving output, productivity and profit in manufacturing industry and commerce to bring about the increased production to provide the additional public expenditure programmes which the hon. Gentleman seeks.

The most revealing phrase in the Budget Statement yesterday came when the Chancellor of the Exchequer said: Moreover a Rake's Progress of this nature could not last for long."—[Official Report, 15th April 1975; Vol. 890, c. 283.] The right hon. Gentleman was talking to his Left wing about the dangers of a continuously expanding programme of the kind that we have had in the past year. However, this was an apt description of what he himself had been about during the past year.

In this Budget we have seen that we are paying the price for the approach of the Labour Party at the February General Election in putting forward an unrealistic programme in relation to the problems and prospects that we faced as a result of the oil crisis, and its approach which said: "Vote for us, and we shall get you back to work without considering the costs."

Even more, we are paying the price for what the Labour Party did in the succeeding months to win the October General Election, when it engaged in a massive programme of bribes and deceits, and we only see now in the figures given us for the public sector borrowing requirement and the increase in public expenditure just how great that was. Even after winning the October election, the Labour Government went on with that programme.

I listened to the first half of the right hon. Gentleman's statement and found it a devastating indictment of his economic management in the past year. It could not have been better put by those critics on the Opposition benches and outside this House who warned him of the con- sequences of his actions precisely along these lines at the time that he was engaged in them.

I blame the right hon. Gentleman for the lack of control over public expenditure, but I have some sympathy for him in other areas. He has been let down by guilty men elsewhere. He has been let down by the Secretary of State for Employment, who has allowed wage inflation to rip ahead without so much as lifting a finger to tackle it at the right stages of a negotiation. He has been let down by the Secretary of State for Industry and the devastating effects of his policies on industrial confidence. He has been let down by the Department of the Environment, which has set in train the huge rise in subsidies on the housing front, which will now be very frequently directed to those who do not need them, and which will be one of his most difficult tasks to tackle in bringing down public expenditure. Finally, he has been let down by the Department of Energy for the way in which it set out on its energy programme but which, happily, it has now reversed. The Chancellor of the Exchequer referred to the delay in the expected flow of oil as being "a not insignificant factor" in his increasing difficulties. The right hon. Gentleman has his colleague the Secretary of State for Energy to thank for bringing that about.

There are a number of aspects about the present Budget which worry me. I wish to refer briefly to a few of them.

First, I refer again to the public sector borrowing requirement. I listened to the analysis made by the Chancellor of the Exchequer and I assumed that, knowing that the borrowing requirement was about £7·6 billion for the year now past, we should see some reduction. Yet I then learned, to my astonishment, that it is about to rise again by another £.1.4 billion at an extraordinarily vulnerable time for our economy.

I ask two questions. First, how are we to meet this public sector borrowing requirement if we cannot borrow abroad to the extent that we have been able in the past year? The right hon. Gentleman said that it might be difficult but, with the possible rising strength of the dollar, it could become even more difficult. There is a dangerous problem there already.

Secondly, if the borrowing requirement is to be met mainly by internal borrowing, what effect will this have on the money supply? The Chancellor of the Exchequer boasted of his control over the money supply in the past year. Quite a large part of that has been due to the fact that he was able to borrow from overseas.

I have been looking at the projected level of the public sector borrowing requirement. The Chancellor of the Exchequer should have acted more on public expenditure in this year, especially in current spending areas, and started to tackle the rising cost of housing subsidies and to bring down this year the level of food subsidies.

But worse, I suspect that this £9 billion will not be the true figure. Looking at the situation between last November and now, the Chancellor of the Exchequer confessed yesterday that £1.000 million extra in the borrowing requirement had been the result of increases in wages and salaries in the public sector not anticipated at the time, and there is as yet no sign that the right hon. Gentleman is able to get to grips with problems of that kind. So we face the possibility of a further increase in that area in the coming year. It is essential that he keeps to his target. It should have been much lower. But it worries me that he will not be able to do so on present policies.

I come, then, to the wages situation. It is patently obvious to all and has been admitted by many hon. Members in this debate that in the past year the social contract has not succeeded. I listened with interest to the excellent speech of the hon. Member for Meriden (Mr. Tomlinson), and even in those parts where I disagreed with him he put forward some convincing arguments about an incomes policy.

I am aware of the difficulties, but we have to admit that there are equal difficulties in the policy which has been pursued in the past year. If the attempts which the right hon. Gentleman is now making to bring down the level of wage inflation do not succeed it is obvious that he will have to take other action, and the announcement that the General Secretary of the National Union of Railwaymen has said that he intends to seek an additional 11 per cent. in his coming negotiations as a result of the Budget does not give one much cause for hope.

How long can we wait for the leapfrogging to stop? We may be forced to a stronger wage policy, and it is necessary to discuss it now. Especially in this situation, we need firmer Government control over the public sector. At the moment, it looks as if there will be no end to the claims from this sector, whereas the evidence is that, because of the economic climate the policies are already beginning to act in a voluntary form in the private sector. It was the OECD which warned that there must be firmer restraint over wages in the coming year. It is clear from the right hon. Gentleman's many analyses of our position vis-à-vis other countries that he understands what that means.

In this peculiar and difficult situation, we ought to ask ourselves whether it would have been any worse this year if we had had firmer restraints on wages than the policy which has been followed of letting them rip and then taxing them back. The consequences of that policy compared with firmer control over wages have been—and will continue to be—higher unemployment than necessary, pricing ourselves out of markets because of our comparative increases in costs only as a result of the wages factor compared with our major competitors, and a savage effect on industrial confidence and hence on investment.

It will also mean a reduction in investment in this country from overseas because of the fears of multinational companies that, until we get our wages situation under control, this is a dangerous area in which to engage in further investment.

Finally, on this front, we must look carefully at the effects of what has happened in the past year on different groups. It is always argued, and I agree, that an incomes policy has an unfair incidence between different groups. But can we say that that has been missing from the situation that we have seen in the past year? The penalty for the social contract which everyone is now paying as a result of the Budget is being paid for more by those who were never party to it and by those who have tried to observe it. That seems an unfair incidence of the wages policy which the social contract is supposed to be.

Would it not have been better to work for greater wage restraint, more control over public expenditure and, with it, ultimately a reduction in direct taxes so that we could have the opposite of the effects to which I have referred? Indeed, it is worth reminding ourselves that the OECD argued that we could have achieved the same effect in real incomes in the past year for the community as a whole by wage rises of 12 per cent., which would have produced a price rise situation of 9 per cent., and not suffered the competitive disadvantages that I have just described.

That leads me to the double impact of inflation and unadjusted tax rates, which is a strong argument again, in this highly inflationary period, for indexation—not indexation over the board but purely on the thresholds of tax allowances and the higher rates.

Looking at Table 8 of the Red Book, we see that the yield from direct taxation in one year has risen from £10,000 million this past year to over £14,000 million projected for the next year. That extraordinary rise results from the combination of inflation and increased taxation.

Looking at individual figures, it is not correct, as the Chancellor is trying to put about, that most people will be paying less tax next year. Taking gross incomes and allowing for inflation in incomes at only 20 per cent. over the past year—not even the true level of increases—a married man with two children who a year ago was earning £1,500 will find his tax up from £68 to £145. Admittedly, real earnings have increased, but the tax bill is up. Moving to the other extreme, a married man with two children on £10,000 a year will find that his tax bill has gone up from £3,525 to £4,876. It is this effect on incomes—particularly as we start to move into the slightly higher income areas—and the non-indexing of the tax thresholds combined with inflation, which is leading to one of the great unfairnesses of inflation.

I ask the Financial Secretary to supply me, in a letter—because he could not do so in a Written Answer—with figures of the necessary gross salary that would need to be achieved by a man to have the same net income as in 1964. At the £2,000 level in 1964, the corresponding amount is £4,148. That was last year, so we must add more now. At the £8,000 level the figure now is well over £21,000. It is this sort of effect which leads to the ludicrous situation today that a man earning £10,000 a year needs a salary rise each year of 35 per cent. to 45 per per cent. to maintain his standard of living.

I know that many hon. Gentlemen opposite and people at these income levels are not concerned about the situation. However this double impost is worrying, because at all income levels it is likely to increase wage demands. It will also have serious effects on management, the professions and those with special skills. Recently I met a number of doctors who, because of this, are contemplating going to appointments overseas. One cannot blame them. If they feel that their living standards are being savagely eroded each year, as they are, it is right for them to try to protect themselves and their families and to get some return for the substantial investment in training and skills that they have acquired over many years. There will also be a serious effect on long-term savings.

I should like to conclude with some remarks on the capital transfer tax. It is disgraceful that there is to be no opportunity to discuss the many elements of capital transfer tax which should still be dealt with, some of which the Financial Secretary has ready to be done before 1st April 1976. I hope that we shall have an assurance that before next year£we shall no doubt have another Budget in the year£there will be an opportunity to put those matters right. I must put on record that I do not believe that the changes in the capital gains tax are adequate to protect farms and small businesses.

We have in this Budget the first signs of realism, though I must agree with an economic commentator today who said that it is not primarily an economic management exercise, but a method of meeting a fraction—I emphasise "fraction"—of the cost of the transfer of resources from private to public pockets.

We all know of the difficulties that faced the Chancellor. It is not a conspiracy of the Left wing, but a total outright and ever-enlarging attack. The right hon. Gentleman has put up the first resistance. However, I fear that he will have to strengthen his defences even more before long. It will be essential if he is to match his actions to the analysis he outlined yesterday and the objectives he set himself.